The meaning of Chrysler

The Obama administration’s misbehavior in the matter of Chrysyler is fundamentally inconsistent with the Constitution and the rule of law. In today’s Wall Street Journal, Professor Todd Zywicki explains:

The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”

The Obama administration’s behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors — entitled to first priority payment under the “absolute priority rule” — have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.

Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

The case of Chrysler illustrates a proposition on which we have elaborated here previously and that warrants repetition. For the past hundred years the attack on private property has been central to the Progressive assault on the Constitution, beginning with J. Allen Smith’s The Spirit of American Government (1907) and continuing most importantly with Charles Beard’s An Economic Interpretation of the Constitution (1913).

Smith and Beard portrayed the constitutional protection of private property by the founders as the weapon of an elite interested in preserving its privilege. (By the time scholars got around to debunking Beard’s book in particular — few serious works of history have been as definitively disproved as Beard’s — the damage had been done.) Today the Progressive assault on property rights continues in the scholarship of liberals such as Obama administration official Cass Sunstein.

The American Revolution is of course the appropriate place to begin to understand the role of property rights in the American legal order. The American Revolution was in part a rebellion against the feudal order, remnants of which still prevailed in Great Britain. In the feudal order all property belonged to the King; the King retained ownership but conditionally granted the use of property to his subjects.

By contrast, the idea that men possessed the right to acquire and enjoy property separate and apart from the prerogative of sovereign government was one of the “unalienable rights” grounded in “the laws of Nature and Nature’s God” at the heart of the American Revolution. In the founders’ view, property rights did not emanate from government. Rather, they emanated from the nature of man, and it was the function of government to protect the rights conferred on man by nature.

Indeed, Jefferson characterized property rights as “the first principle of association, the guarantee to everyone [of] the free exercise of industry and the fruits acquired by it.” As Jefferson’s comment suggests, the right to acquire property was the critical right for the founders; it made property rights the friend of the poor by allowing them to earn and safeguard wealth (“the fruits acquired by” work).

Accordingly, when the founders crafted the Constitution and Bill of Rights, they provided numerous protections of property rights. Congress was authorized to protect the intellectual property of writers and inventors through the issuance of patents and copyrights. The states were prohibited from impairing private contractual obligations.

Further, putting property on a par with life and liberty, the Constitution prohibited the government from taking property in any criminal case without due process. And in the takings clause of the Fifth Amendment, the government was prohibited from taking private property for public use without just compensation; the government was not even afforded the power to take private property for anything but public use.

The founders extended these and other specific protections to the property of Americans in the fundamental law of the United States for the sake of freedom. The freedom to exercise and profit from one’s abilities without regard to caste or class was in the view of the founders the essence of freedom.

As James Madison wrote in the Federalist Papers, “the first object of government” is the “protection of the diversity in the faculties [abilities] of men, from which the rights of property originate.” In the eyes of the founders, the protection of property rights was a bulwark for the poor in assuring them that the wealth earned with the sweat of their brow could not arbitrarily be expropriated by the heavy hand of government.

It was precisely on this ground that Lincoln sought to persuade Americans of the injustice of slavery. Lincoln persistently argued that slavery was a species of tyranny enacting the ancient injustice of the principle “you work, and I eat.” He often spoke of the heart of slavery as a denial of property rights: “It is the same tyrannical principle that says, ‘You work and toil and earn bread, and I’ll eat it.’”

When Stephen Douglas mocked Lincoln during their debates for believing in the equality of a black slave with white citizens, Lincoln said: “In some respects she certainly is not my equal; but in her natural right to eat the bread she earns with her own hands without asking leave of anyone else, she is my equal, and the equal of all others.”

The founders’ study of history taught them that majority rule was susceptible to tyranny and that the protection of property rights was an indispensable condition for the preservation of freedom and for the growth of national wealth. The founders observed that tyrannical rule and material scarcity had by and large been the fate of man through the ages. They saw the confiscation of property by government in the name of the sovereign power of the state as an old and sorry story. Through the protection of property rights they meant to forge a new order of the ages. It lies to us to regain their understanding and act on it.

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